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Russia State Gas, Oil Firms Merge

Aim Is to Create Dominant International Supplier

By Peter Baker
Washington Post Foreign Service
Wednesday, September 15, 2004; Page E01

MOSCOW, Sept. 14 -- Gazprom, the Russian state-controlled natural gas monopoly, announced Tuesday that it will take over the state oil firm Rosneft as part of a bold plan to transform itself into a dominant integrated energy supplier in the international market.

Already the world's largest natural gas company, Gazprom now will become a more significant oil producer as well. Some analysts saw the move as a precursor to an even more dramatic step by the state to take over the core production unit of oil giant Yukos and merge it into the new Gazprom to create an energy conglomerate under Kremlin control.

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Although Gazprom's chief executive disavowed any interest in profiting from the politically charged Yukos case Tuesday, Russian Prime Minister Mikhail Fradkov made clear that the state had plans for "ambitious" expansion of Gazprom beyond Rosneft. "We will soon receive a large company that in the future would be turned into a transnational company of world significance," Fradkov said.

In executing the complex stock swap, the state would increase its ownership of Gazprom to more than 50 percent. President Vladimir Putin has approved a plan to liberalize stock rules to allow direct foreign investment in the company. The decision cheered investors who have worried that the state's relentless tax and legal battles against Yukos and its owners signaled an increasing hostility to market capitalism in the new Russia.

"It shows that Putin actually cares about foreign investment," said William F. Browder, chief executive of the investment firm Hermitage Capital Management, who has campaigned for years to reform Gazprom stock ownership rules. The liberalization of Gazprom investment would be "some sort of sugar to help the Yukos medicine go down."

For Russia, Gazprom is a powerful economic and political player, a company that produces about 20 percent of the world's natural gas and by itself represents 8 percent of the country's gross domestic product. For years, it has also been a source of corruption as insiders peeled off its assets or won lucrative contracts.

The state owns 38 percent of Gazprom outright and the company owns 13 percent of its own stock through subsidiaries. Putin has wanted to increase the state's share to a pure majority but did not want to go to the open market to buy stock at high prices. The solution Fradkov announced Tuesday would have the state give Rosneft to Gazprom in exchange for the 13 percent owned by the Gazprom subsidiaries.

Rosneft, whose board of directors is headed by Putin aide Igor Sechin, pumps about 390,000 barrels of oil a day and has plans to increase production by more than 50 percent by 2009. By absorbing Rosneft, Gazprom will quadruple its oil output, moving it further toward the goal it set this year of becoming a major petroleum producer.

Under Gazprom's current "ring fence" ownership rules, foreigners can buy only a small fraction of company stock through American depository receipts that trade at a significant premium. Many foreigners have gotten around that by purchasing shares through Russian subsidiaries they call gray structures, but they have felt vulnerable if the state ever decided to crack down.

Now that the state will own a majority outright, officials said they can allow foreigners to buy directly into the company without worrying about losing control. Analysts and investors said that would pump far more money into Gazprom and raise its market value.

"This will help the whole market," said Boris Fyodorov, a former finance minister and investor who has long pushed for reforms at Gazprom. "Some liberals will say the government controls more rather than less. But let's be honest -- the state already controls Gazprom."

How the move will play into the long-running Yukos drama remained uncertain. The state has hit Yukos with $7.5 billion in back tax bills and thrown its chief shareholder, Mikhail Khodorkovsky, in prison in what analysts consider political retribution against a Putin rival. The state has moved to strip Yukos's core production unit, Yuganskneftegaz, to satisfy the back tax claims and Rosneft had been lobbying the Kremlin for the right to take it over.

The new merger seemed to suggest Gazprom might be the vehicle for the state to take over Yuganskneftegaz, which pumps 1 million barrels of oil a day. "The thought is natural and I believe most people here think this way," said Valery Nesterov, an analyst at Troika Dialog investment bank. "It seems logical."

© 2004 The Washington Post Company